Clegg’s justification for deficit hawk conversion doesn’t stack up

Nick Clegg spoke on Today about his change of heart on the timetable for deficit reduction. His justification for switching from a Keynesian to a deficit hawk does not stack up.

Nick Clegg was given a tough time by Justin Webb on the Today programme this morning about the timing of his change of heart on the timetable for deficit reduction. His justification for switching from being a Keynesian to a deficit hawk does not stack up.

Nick Clegg repeatedly told Webb that, “What we said was that the timing of deficit reduction has to be governed by economics.” During the election campaign, the Institute for Fiscal Studies examined whether the Liberal Democrats were “planning to be more ambitious than Labour in reducing the deficit”, concluding:

“If anything the manifesto implies the opposite: it says that a Liberal Democrat government would carry out a Spending Review over the summer and autumn ‘with the objective of identifying the remaining [our italics] cuts needed to, at a minimum, halve the deficit by 2013-14′.

“At face value this might suggest a less ambitious plan to reduce the deficit overall than that implied by the forecasts in the Budget. The Budget predicted that the deficit (total government borrowing) would be down to 5.2% of national income in 2013-14, whereas halving it means that it need not be reduced below 5.9% of national income (half the 11.8% forecast for 2009-10).

“But the Liberal Democrats tell us that this promise to “at a minimum, halve the deficit” should be taken as shorthand for matching the deficit reduction path set out in the Budget. So, overall, they are no more or less ambitious than the Government.“

And just five days before the country went to the polls, Nick Clegg – when asked by Reuters about the Conservative party’s plans – said:

“Us siding with Labour? It’s siding with common sense.

“My eight-year-old ought to be able to work this out – you shouldn’t start slamming on the brakes when the economy is barely growing. If you do that you create more joblessness, you create heavier costs on the state, the deficit goes up even further and the pain with dealing with it is even greater. So it is completely irrational.”

The Lib Dem leader claimed on Today that he changed his mind because “The economic circumstances [became] more perilous.” He referred to “a climate of sovereign debt crises”. Presumably this meant the Greek crisis which had been rumbling along prior to Clegg’s Reuters remarks. Indeed, contagion was already taking place in late April. On April 28th, after two days of turmoil in global markets, OECD secretary general said:

“It’s not a question of the danger of contagion; contagion has already happened.”

Clegg, of course, has form. He initially claimed that he had changed his mind as a result of a conversation with Mervyn King after the election – a point on which he later recanted claiming, “I changed my mind earlier than that.” When exactly remains unclear.

The emphasis for fiscal consolidation must fall on controlling public spending, not higher taxes: to commit to additional tax revenue raising from the outset undermines any commitment to setting priorities in spending. This process will be painful and difficult. It will involve real cuts in many areas and will mean that the big budgets – health, welfare, defence and education – must be tackled. There should be no “ring fenced” areas of spending. Existing spending has to be justified, not simply assumed to be necessary and trimmed at the edges.

The traditional method of “salami slicing” with across-the- board cuts to all services without any priorities being set, causes considerable damage to valued services. Instead, a systematic process of selecting high and low priorities for public spending is needed. … No doubt public administrators can be made more conscious of costs and efficient management, but it is not credible to believe that greater “efficiency” is a panacea, not least because it has been invariably promised and not delivered
in the past.

Nine specific areas of potential savings are identified as a start to a radical programme of reform. The main proposals are:

> Zero growth overall for public sector pay (saving £2.4 billion a year), a 25 per cent reduction in the total pay bill of staff earning over £100,000 and a salary freeze and end of bonuses for the civil service (saving £200 million a year).

> Tapering the family element of the tax credit – saving £1.35 billion.

> A radical review of public sector pensions with the view to moving to higher employee contributions and later retirement ages. There is currently a £28 billion subsidy to unfunded schemes.

> Scrapping several major IT systems including the ID card scheme (£5 billion over 10 years), Contactpoint (£200 million over 5 years), the NHS IT scheme (£250 million over the next 5 years) and the proposed “super database” (£6 billion).

> Curbing “industrial policy”, including scrapping Regional Development Agencies (£2.3 billion annually) and EGCD subsidies (£100 million annually) and reducing (by at least half) the Train to Gain and Skills Councils budgets (£990 million together a year).

> Reforming the National Health Service, by reducing the centralisation and over-administration – starting by scrapping Strategic Health Authorities (£200 million a year) – by strengthening commissioning and with “supply side reform” – in particular tariff reform could save around £2 billion a year.

> Curbing the centralisation in education, by cutting national strategies and scrapping quangos – saving around £600 million a year.

> Examining possible future public sector asset sales, including some aspects of the Highways Agency (land value of £80 billion) and intangibles such as spectrum, landing rights and emissions trading.

Fiscal policy is political. Politicians must not shy away from explaining in detail how they will tackle the problem of deficits and debt. The proposals outlined in this paper do not constitute an exclusive or exhaustive list. Major, specific areas of potential savings are identified though the examples are illustrative and represent only a first, rough, attempt. Undoubtedly more are required to meet the exacting fiscal disciplines that will be required.
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Sounded like a hawk, governing like a hawk, ergo is definitely a deficit hawk.

http://wjshgenius@talktalk.net william

The reason 10 year gilt yields have hit an all time low is the market’s appreciation of the coalition’s deficit reduction programme.Without it, HMG would pay Irish type rates.Can we please learn the lessons of Brown’s calamitous spend and borrow, so that the electorate realises we have learnt the lesson.

Guido – We all remember the Lib Dems “savage cuts” warning which disappeared as soon as Clegg got rebuked at Lib Dem conference last year. That’s why they went into election with a very clear message.

In February, Vince Cable wrote, “I believe government borrowing has to be reduced; but the timing has to reflect the health of the economy.Two hundred press-ups in the gym, as ordered by Dr Osborne, could kill the patient.”

In March, Channel 4 News reported that Nick Clegg said “merrily slashing now” would be “an act of economic masochism” as he made it clear that the Lib Dems would not support plans, backed by the Conservatives, for early cuts to public spending at the Lib Dems’ March conference.

Then in a Newsnight interview on April 12 with Jeremy Paxman, Clegg said, “Do I think that these big, big cuts are merited or justified at a time when the economy is struggling to get to its feet? Clearly not.”

William – Absolute tosh. Gilt yields were falling long before the election because Darling’s plan to halve the deficit in four years was credible. There are twin risks here: one is rising interest payments, the other is reduced economic growth causing a higher deficit. In addition to their widely reported remarks, Moody’s said yesterday “significantly slower economic growth” could jeapordise the credit rating.

So are Vince Cable’s public spending cuts his own, or are they Lib Dem policy? In his Straight Talk interview with the Lib Dem treasury spokesman this weekend, Andrew Neil tries to get to the bottom of it all. The result? Well, according to Cable, Nick Clegg “approved” his pamphlet for the think tank Reform, and some of its contents could find their way into the party’s manifesto:

“A lot of it is already Lib Dem policy, a lot of it already is, the rest of it will have to be considered and we’ll go into an election with a manifesto, we have a due process. Maybe because of who I am a lot of it will be there, but some of it may not be, it has to be agreed with my colleagues of course.”

However, it does add credence to the theory that Clegg wanted to shift the party.

Perhaps he and David Laws did not particularly favour their own election argument. But on that point, he could not have carried the party or kept his shadow Chancellor, as Cable was in favour of their scale/speed of the deficit reduction argument even if Clegg’s real position is quite cloudy. Clegg was more interested in the public politics of the debate than the economics, I think it is fair to say.

http://wjshgenius@talktalk.net william

Will, it’s not tosh.The electorate did not vote in sufficient numbers for Darling,they voted for Osborne’s road, and like it or not Clegg agreed with them pronto.Labour will end up the third party in 10 years time, unless it owns up about Brown.

http://www.therewesaidit.co.uk Jonathan da Silva

Picking over what a party/individual’s say in an election and what it has to say in a coalition is just weak kneed shit. Honestly do you expect him to say we did it as price of coalition?

Ed Balls decries everything as everyone else’s mistakes. Quite how anyone at the Treasury from 97 to 10 can pretend they patronise John Maynard Keynes is a conversion to rank with the mythical ones in the fairy story book I was force fed at school. Ed Balls The man who was not there. The other Ed you know the one who is now into liberty but who supported enthusiastically endorsed 90 day detention. A lot of people have undergone dramatic conversions in the last few months bar David Miliband and I am not not sure it’s his best feature!

Even leaders compromise on manifestos and they certainly do with coalitions. To be taken seriously merely being a Labour rhetoric pumping machine is ridiculous. To try to play silly games about he said then he says now may be great for morons but is the nature of politics.

We know all parties move with the real politik, vested interests and public opinion to a degree.

This is small beer.

Sunder Katwala

Guido is mistakenly conflating two different things in his claim for pre-election Cable as a “deficit hawk”.

(i) The natural reading of “deficit hawk” is somebody who wants a deeper and faster reduction in the deficit, as with the LibDems post-election shift from a Darling equivalent position to an Osborne one.

This is a doubling the scale/pace debate in a hawkish direction. (It is mainly between deficit hawks and semi-hawks; you can claim it is between deficit hawks and doves if you really think the sovereign risk default risk to the Darling strategy. Anybody calling that position deficit denial is just being deliberately misleading).

(ii) Secondly, whether the strategy is Darling, Cable(1), or Osborne-Clegg, there is the question of the measures to achieve the necessary tightening of the deficit. These will need to be a combination of tax rises and spending cuts, calculated after any differential positive/reduced impact on receipts through growth, increased/reduced spending on consequences of other choices (eg tax receipts, unemployment impacts of higher/lower GDP in the short-term, which the OBR projections seek to set out). So Guido is (erroneously) labelling pre-election Cable a “deficit hawk” [implicitly pro-Osborne] for setting out some of the possible routes to meeting his Darling/Cable semi-hawk/more doveish position in his Reform pamphlet.

These plans may also be needed to address the impact of any discretionary extra spending or tax commitments the parties make (such as marriage tax allowances or income tax cuts on one side; or whatever is proposed by different parties on bank levies, mansion taxes, NI rises, etc to raise revenue on the other).

The LibDems’ main election pledge was a £17 billion tax cut, by raising income tax thresholds. That means that Cable also had to propose a range of other tax raising and spending reduction measures to get back to a Darling position. If he felt that he needed to consider his Reform pamphlet proposals to help him to do that (and/or reduce the need for public service cuts), then he does not become a “deficit hawk” if adopting those policies doesn’t mean a tighter approach to the deficit